‘Mortgage prisoners’ are people who are unable to switch mortgages to a better deal, despite being up-to-date with their mortgage payments.
Where does the name come from?
As the name suggests it is a situation where homeowners are ‘trapped’ in their existing mortgage, unable to switch to a deal with better terms, or rates. The term ‘mortgage prisoner’ surfaced during the financial crisis of 2008.
How does someone become a mortgage prisoner?
Mortgage prisoners often arise due to a combination of factors such as changes in economic downturns, lending practices, and regulatory constraints.
Below are a couple of scenarios which could lead to a borrower becoming a mortgage prisoner:
- High Loan-to-Value (LTV) Ratio: if you have taken out a mortgage with high LTV ratios, which means you borrowed a large portion of the property’s value (read more about LTV here). If the value of the property declines, or if your financial situation deteriorates, you may find yourself in a position where you owe more on your mortgage that the property is actually worth. This can make it difficult to refinance or switch lenders.
- Tightened Lending Criteria: following the financial crisis, lenders have implemented stricter lending criteria, making it more difficult for borrowers to secure new mortgages. This means, some existing homeowners who were previously able to get a mortgage do not meet the new criteria when trying to switch to a new lender or negotiate terms.
Unfortunately, mortgage prisoners may be stuck with higher interest rates and unable to benefit from any lower interest rates on the market. There are regulations and policies in place which provide initiatives to provide relief and potential solutions for those affected and facing financial hardship.
